Minority shareholders and minority shareholders protection in the management of joint stock companies (“JSC”) in Vietnam is regarded as one of the issues that requires attention, particularly in the provisions in the Law on Enterprises 2020.
In this article, BLawyers Vietnam presents information about the legal provisions for minority shareholders protection in Vietnam.
1. Definition of minority shareholders in a JSC
The definition of minority shareholders is not specified in the Law on Enterprises 2020 (“LOE 2020”). In addition, other legal documents do not define the number of shares owned by shareholders or the percentage of ownership to be determined as minority shareholders.
According to the Law on Securities 2019, majority shareholders are shareholders owning 5% or more of the voting shares of an issuer. However, the Law on Securities 2019 only defines majority shareholders without clarifying what small shareholders or minority shareholders are.
Previously, the definition of minority shareholders was explained in Decree No. 48/1998/ND-CP as follows: “A minority shareholder is a holder of less than 1% of the voting shares of an issuer.” However, after this Decree expired on 16 December 2003, subsequent legal documents no longer included any provisions explaining the definition of minority shareholders.
A minority shareholder, according to the definition in Cambridge Dictionary, is a person or organization that owns fewer shares in a company than the controlling shareholder. According to this definition, minority shareholders are shareholders who own a small percentage of shares in a JSC and cannot dominate and control the company’s activities in comparison to majority shareholders (large shareholders) – shareholders holding many shares.
Therefore, it can be understood that the definition of minority shareholders should be based on two factors: (i) the contributed capital (percentage) of shareholders in the charter capital of the company; and (ii) the role and dominant ability of shareholders in important issues of the company.
2. Why Vietnamese law protects minority shareholders in JSCs?
Although minority shareholders hold a small number of shares in a JSC, the total number of shares held by minority shareholders can account for a significant proportion of the company. In fact, minority shareholders invest individually and are not linked together to create a dominant position in management activities in the company.
With the operating mechanism of the General Meeting of Shareholders (“GMS”) based on the principle of majority decision, the more shares that shareholders own, the more advantages and power they have when voting. Therefore, minority shareholders are often disadvantaged, viewed as inferior, and are overwhelmed by majority shareholders when exercising their voting rights, and have limited access to information and participation in company control activities.
Majority shareholders can use their dominance on the Board of Directors and the Supervisory Board to cause damage to minority shareholders through decisions made without minority shareholders’ opinions. Therefore, minority shareholders need to have a mechanism to protect their legal rights against majority shareholders.
Although LOE 2020 stipulated the basic rights of minority shareholders in JSCs, their rights are often violated in the following ways:
(i) Right to attend and vote at the GMS
According to the LOE 2020, all ordinary shareholders have the right to attend and speak at the GMS and exercise voting rights, with each ordinary share having one vote. Therefore, all shareholders have the right to attend and vote at the GMS, whether they are minority shareholders or majority shareholders.
However, in practice, the right of minority shareholders in JSC to attend the GMS is often violated, and minority shareholders cannot participate in the GMS. The common reason is that the minority shareholders did not receive the meeting invitation letter or the letter to collect shareholders’ votes, or the meeting room used to hold the meeting did not have enough capacity for all shareholders to attend the meeting.
(ii) Right to access company information
Shareholders have the right to access company information to understand the company’s operation and make reasonable investment decisions. Access to company information provides a basis for minority shareholders to exercise their basic rights and helps minority shareholders understand the business situation of the company so they can have solutions to limit and prevent violations.
However, minority shareholders can face difficulties in accessing internal information of the company, or access can be limited or inaccurate. Normally, minority shareholders are not notified of the GMS’s decision, financial statements, or dividend payment notices. Even when minority shareholders attempt to request verification of information about the company, they are denied.
3. Role of Law on Enterprises 2020 in protecting minority shareholders in JSCs
As mentioned above, although each minority shareholder holds only a small percentage of shares in the company, their total number can account for a significant and influential proportion in JSCs. Shareholders, whether large or small, invest money in the company to earn profits and their invested capital contributes to the formation of the company. Therefore, if the interests of minority shareholders are effectively protected, they will be assured that their investment is secure, which will encourage shareholders to invest in the company. No one wants to put their money into a company where their rights are not guaranteed.
Furthermore, minority shareholders’ protection in the Law on Enterprises 2020 also has an impact on the stable and long-term development of the company by avoiding the risk of conflicts affecting the operations of JSCs.
The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at firstname.lastname@example.org. We would love to hear from you.
Date: 26 April 2023
Writer: Linh Nguyen